You’ll notice a lot of deductions when you receive your first salary slip in Germany. From income tax to pension insurance, health insurance to church tax. Many payments are taken at source by your employer. However, you can opt out of some of these, dependent on your earnings and registration status.
Either way, there’s a lot to get your head around if you want to truly understand where your money’s going.
Demystifying your German payslip
Imagine the scene: You’ve finally reached the end of your first month in Germany. You’ve found somewhere to live, you’ve cleared all the administrative hurdles, and work is going great. Then you suddenly hit the ground with a bump because you’ve received your first payslip in Germany and you don’t have a clue what it means.
What are all of these deductions?
And all the confusing abbreviations?
Well, worry not. We’ve summarised what to expect so you can decipher this baffling slip of paper, hassle free.
And if you’re still struggling, we can help you with a 1:1 session!
Typical deductions to expect on your German payslip
Before we begin, it’s important to note that each employer is different. While there are a lot of common deductions, many others are dependent upon your specific contract.
Things such as stock options and life insurance offered through employers can make things a little more complex, so this is just meant to guide you through the basics.
With that said, let’s start breaking down some typical deductions.
Lohnsteuer (Income tax payable on your salary)
Germany has a progressive income tax system which taxes at a higher rate once you hit certain thresholds. Perhaps unsurprisingly, this one will be the biggest deduction from your German payslip.
Not to be confused with income tax in general (German: Einkommenssteuer).
If you also have income from other sources e.g. if you have some sort of self-employed gig on the side, or if you have income from interest, rental properties, dividends on stocks etc, these also count towards your taxable personal income.
Therefore, the terms Lohnsteuer and Einkommensteuer are not synonyms for the same thing.
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Rentenversicherung (Pension insurance)
This is levied in order to cover an old age pension when an employee retires, as well as providing a basic income for anyone who is no longer deemed fit to work through incapacity.
However, it’s very important to note that this is not your own individual pension plan.
Rather, this is money which is being paid by the current working population in order to sustain today’s retirees. As a result, the system is highly dependent upon the working population proportionally being able to support pensioners at any given point in time.
Rentenversicherung is levied at a whopping 19.6% of gross salary, of which half is paid by the employer and half by the employee.
Krankenversicherung (Health insurance)
At 14.6% of your gross salary in total, this is the next biggest hitter after income tax and pension insurance.
For those of you who are publicly insured, there is a 50 / 50 split between employer and employee when it comes to contributions. This will be evidenced in your payslip usually by the words AN-Anteil (employee contribution) and AG Anteil (employer contribution).
If you’re privately insured, you will see something like AG-Zuschuss as a line on your payslip. This represents the 50% contribution by your employer towards your private healthcare costs.
Because you are responsible for contributions for private healthcare, this is not deductible from your gross pay. As such, the employer contribution is added to your gross salary, thus enabling you to pay this in one monthly direct debit to your health insurance company.
Usually this is found at the bottom of your payslip, after all of your taxes and social insurances have been deducted.
Note that if you are privately insured, your monthly premiums will be calculated according to your individual personal tariff, as opposed to a flat % rate as is the case for the public insurance system.
For more on how German health insurance works, we have a number of articles covering this topic in much more detail. Suffice to say, it’s complex!
Pflegeversicherung (Long-term care insurance)
This is similar to health insurance insofar as you can opt out of public insurance if you earn above the same threshold as for health insurance.
Long-term care insurance for those publicly insured is at 2.55% of gross income for families with children and at 2.8% for those who are childless. As with health insurance, these contributions are split 50 / 50 between employer and employee.
Kirchensteuer (Church tax)
Church tax is levied by the Finanzamt on behalf of the church institutions in Germany. The rate you pay is dependent upon the Bundesland in which you live: Bavaria and Baden-Württemberg levy 8% on the total amount of income tax paid, whereas in all other Länder it comes in at 9%.
The good thing is this tax is entirely voluntary and is dependent upon your religious affiliation. In other words, if you don’t have one, you are exempt.
Refer also to this article which outlines more about church tax, and how to get out of paying it in case you slipped into this unknowingly by declaring a religion on your Anmeldungsformular, even though you are a non-practicing Christian.
Solidaritätszuschlag (Solidarity surcharge)
Commonly referred to as “Soli”, this is taxable at 5.5% of total income tax paid and appears as a separate line on your German payslip. There are some exclusions for extremely low earners, but it is highly unlikely this will affect you due to the threshold being so low.
This tax was brought in after German reunification to fund the massive infrastructure projects necessary to bring East Germany up to the standards of the West. Originally it was set to only be levied until 2019.
However, despite pressure from the liberal FDP party and economic pressure groups such as the German Taxpayers’ Alliance, it appears that the German government will renege on this pledge and either levy this tax on an ongoing basis, or gradually phase it out over the coming years.
“Soli” is paid in full by the employee. Interesting to note that this is also levied on capital gains, as well as on corporation tax.
Arbeitslosenversicherung (Unemployment insurance)
Unemployment insurance is provided in order to guarantee an existential well being in the case of losing one’s job. Contributions were increased to 3% of gross salary from the 2011 tax year.
Contributions are split 50 / 50 between employer and employee.
This gives the employee the right to claim unemployment benefit at 60% of one’s previous net salary for 1 year, known as Arbeitslosengeld I, in the case of being made redundant from their job. This figure increases to 67% if you or your co-habiting partner have one or more children.
Eligibility to claim this money begins after paying into the system for 12 months, with you having the right to the full 1 year of unemployment benefits after paying contributions for at least 24 months.
If the claimant is still unemployed after 1 year, this benefit shifts across to the less favourable Arbeitslosengeld II, or more colloquially known as Hartz IV, named after the politician who headed up the labour reform commission during Gerhard Schröder’s government which resulted in these reforms being introduced.
Contrasting starkly to Arbeitslosengeld I, Hartz IV really is a bare minimum amount paid in order to provide a basic existence.
Others which won’t apply to everyone
Geldwerter Vorteil (benefit in kind)
This is considered as taxable income because it is viewed by the Finazamt as being a benefit in kind, with an equivalent monetary value attached to it which is easy to calculate. Popular examples of this are:
- Company cars (taxed at 1% of the car’s list price, inclusive of VAT)
- Shares given to you by your employer as an additional perk or bonus i.e. not as a contributory share purchase scheme.
Betriebsrente (Company – i.e. private – pension scheme)
Contributions to these vary greatly from company to company. Most involve a contribution from both parties, which will be distinguished by the abbreviations AN (Arbeitnehmer) for employee and AG (Arbeitgeber) for employer.